Every year, the business magazine Forbes prepares a list of
the world’s most powerful women. Next year, most of them will be moving down a
place. Jostling Angela Merkel for the top slot will be Janet Yellen, an
academic economist and expert on unemployment, Barack Obama’s choice as next
chairman of the US Federal Reserve.

Yellen will be the first woman to head America’s central
bank in its 100-year history, and her appointment – which has to be ratified by
the Senate – comes at a critical time, because the Fed's moves in the coming
months and years will reverberate through economies around the world.

Unlike the man described as the rock star of central
bankers, Mark Carney of the Bank of England, Yellen is a self-effacing academic
who has spent much of her career working behind the scenes at the Fed and
teaching students. Her idea of fun is stamp collecting and hosting dinner
parties.

“The president could not have found a better qualified
candidate for this historic nomination,” said Sheila Bair, former chair of the
US bank regulator. “Throughout her career, Janet Yellen has demonstrated a real
commitment to public service, and sincere desire for a stable financial system
which fulfills the needs of the real economy.”

Yellen’s most crucial dilemma will be to decide when – or
how – to turn off the flood of cheap money the Fed has been pouring into the US
economy – at a rate of $85bn a month – to kickstart America's recovery.

When Ben Bernanke, the current chairman, even suggested he
might be ready to start winding down the programme in May, markets from South
America to southern Asia reacted violently.

Yellen has been known as a staunch supporter of Bernanke’s
medicine: “The biggest thing it does is represent continuity in terms of the
policies that the Fed has had in place for a while,” said Karim Basta, director
of economic research and chief investment strategist at the hedge fund III
Associates. “She was the architect of those.”

Yellen, is currently Bernanke’s No 2 and spearheaded many of
the policies that have characterized Bernanke’s more open approach to
communication. She encouraged the Federal Reserve to set specific targets for
inflation and unemployment, to hold more press conferences to explain their
actions, and publish the forecasts of each voting member of the Federal
Reserve’s board of governors.

Analysis by the Wall Street Journal shows that time and
again, her forecasts were most accurate of those on the board. Yellen was not,
however, Obama’s first choice for the job. She won the nomination only after a
long and unusually public battle that pitched her against one of the
president’s key advisers, former Treasury secretary Larry Summers.

Summers withdrew from the race as it became clear that he
would face serious opposition from Obama’s own party, namely senators worried
about the former Clinton adviser’s history of helping deregulate financial
markets.

While Summers faced opposition from the left, Yellen, a
Democrat, is already facing opposition from rightwing senators concerned by her
continuing support of Bernanke’s quantitative easing programme, which they
believe undermines the dollar and risks unleashing inflation.

Even within the White House it is unclear how much support
Yellen really has. Obama aides appear to have been briefing against her in the
run up to the nomination, describing her as methodical, meticulous and somewhat
distant. She was not a “team player”, anonymous sources suggested to media
outlets.

But if anyone is prepared for a fight, it’s the diminutive
Yellen. “Janet is very tough – tough in her views and tough in her
independence,” Laura D’Andrea Tyson, a friend and former Clinton administration
official told USA Today.

Yellen’s career in economics began at Brown University, in
Rhode Island, in 1963, she graduated from there with top honours in 1967. A Fed insider since
1977, when she was an economist with the board of governors, Yellen has
consistently shown she is prepared to speak her mind. Compared to her somewhat
gnomic boss, she is a model of clarity.

Before the housing crash, when Bernanke was still dismissing
signs of a price bubble, and Yellen was San Francisco Fed president, she warned
fellow Fed policy makers there was “a 600lb gorilla in the room, and that is
the housing sector”. She said the risk of a house prices crash and vast numbers
of people losing their homes was causing her “appreciable angst”.

But Yellen has acknowledged that she did little to rein in
the 600lb gorilla. The San Francisco Fed oversaw the mortgage lender
Countrywide Financial, once the largest sub-prime home loan lender in the US.
Yellen admitted to a congressional commission investigating the financial
crisis in 2010 that the Fed did not do enough to halt its excesses.

The rulebook written to curb excessive risk-taking by banks
were inadequate, she told the congressmen. “You could take this, rip it up, and
throw it in the garbage can.”

While she foresaw many of the issues that would trigger the
worst recession in living memory, Yellen did not force through tougher
regulation.

Much of Yellen’s academic research – often carried out with
her husband, fellow Berkeley economics professor George Akerlof, who is a Nobel
prize winner – has focused on the costs and causes of unemployment. “These are
not just statistics to me. We know that long-term unemployment is devastating
to workers and their families,” she said in a speech to a trade union in
February.

For Yellen, economics is not a dry subject: it is about real
lives, and she believes it is worth risking a little inflation if it results in
jobs. She has also analysed single motherhood, denying it is a result of
welfare payments and blaming it on a decline in shotgun weddings.

The economics gene has been passed to Yellen and Akerlof’s
son. Robert Akerlof teaches economics at Warwick University. He may well have
picked up the basics at mealtimes – his mother joked in 1995 that dinner at her
house meant “a diet that is richer in discussions of economics and policy
issues than many people would find appetising.”

Janet Yellen is to be confirmed as Barack Obama's nominee to
chair the US Federal Reserve. Photograph: Eugene Hoshiko/AP

Janet Yellen nominated by Obama to be head of US
Federal Reserve

President will nominate
Yellen as head of US central bank on Wednesday, ending long debate over
successor to Ben Bernanke

The White House is to name Janet Yellen as the first woman
to head the US Federal Reserve, arguably the most important job in world
finance, the Obama administration has confirmed.

Barack Obama is to make the announcement at 3pm ET on
Wednesday, the White House said. Yellen and the current Fed chair, Ben
Bernanke, are expected to attend.

The nomination ends a long – and often bitter – public
debate about Obama's choice for Fed chairman. Yellen has long been seen as the
frontrunner to succeed Bernanke, who is set to step down early next year. But
she faced stiff opposition from former Treasury secretary Larry Summers, who
had strong support within the administration. If approved by the Senate, Yellen
would be the first woman to head the central bank in its 100-year history.

Yellen's appointment comes at a crucial moment for the Fed,
which is currently pumping $85bn (£52bn) a month into the US economy through an
economic stimulus programme known as quantitative easing. Yellen has been seen
as one of Bernanke’s key allies in the stimulus package, which has split the
Fed board, as other members have been increasingly concerned about the impact
of the massive bond-buying programme.

Yellen’s appointment also comes as Congress argues over
raising the US debt ceiling. Bernanke has consistently warned that failure to
raise the US borrowing limit would have a severely negative impact on the
country’s still-fragile economic recovery.

The 67-year-old economist and Brooklyn native was appointed
vice-chair of the Fed in October 2010. Previously she was president and CEO of
the Federal Reserve Bank of San Francisco and also served as chair of the
Council of Economic Advisors from 1997 to 1999.

An expert on the job markets, Yellen has been a staunch ally
of Bernanke as he has tried to use low interest rates and QE to reanimate the
US’s still-lackluster job market.

Summers had been seen as the Obama administration’s favoured
candidate. But his candidacy ran into opposition from Democrats unhappy with
Summers's history as a champion of financial deregulation before the financial
crisis, and was forced to withdraw his candidacy for the position.

Senator Tim Johnson, a Democrat who heads the Senate banking
committee, which must approve Yellen's nomination, said he would work with the
panel's members to advance her confirmation quickly. "She has a depth of
experience that is second to none, and I have no doubt she will be an excellent
Federal Reserve chairman," Johnson said in a statement.

Senator Chuck Schumer, a Democratic committee member, called
her "an excellent choice" and predicted she would be confirmed by a
wide margin.

Yellen had long been considered a logical candidate for the
chairmanship, in part because of her expertise as an economist, her years as a
top bank regulator and her experience in helping manage the Fed's polices. Her
understanding of the financial system is widely respected: before the crisis
struck, she was among a minority of top economists who had warned correctly
that sub-prime mortgages posed a severe threat.

On the Fed, Yellen has built a reputation as a
"dove" — someone who is typically more concerned about keeping
interest rates low to reduce unemployment than about raising them to avert high
inflation. Her nomination could face resistance from congressional critics who
argue that the Fed's low-rate policies have raised the risk of high inflation
and might be encouraging dangerous bubbles in assets like stocks or real
estate.

Republican senator Bob Corker of Tennessee, member of the
Senate banking committee, said he voted against her for vice chair in 2010
because of her dovish policies. "I am not aware of anything that
demonstrates her views have changed," he said.

Still, Yellen has said that when the economy finally begins
growing faster and rates will need to be raised to prevent high inflation, she
will move in that direction.

Yellen drew outspoken support from Senate Democrats, a third
of whom signed a letter this summer urging Obama to choose her. Last month,
more than 350 economists signed a letter to Obama urging him to nominate
Yellen.

Charles Geisst, a finance professor at Manhattan College and
the author of Wall Street: A History, said Bernanke’s successor would have some
tough comparisons to live up to. The current Fed chairman has served since 2006
and was appointed by Obama’s predecessor George W Bush. He has been Fed
chairman during some of the most turbulent economic periods in US history.
“Bernanke will probably go down in history as the man who saved the world’s
financial system,” said Geisst.